The Nearshore world is, to a large extent, still based on labor arbitrage. Though the industry argues that outsourcing provides access to larger talent pools, enables companies to diversify geographically and to capture efficiencies, the reality is that without cheaper labor, outsourcing would not exist.
From the company perspective, the ability to leverage differences in the value of currencies in order to pay less elsewhere, and capture an economic advantage, is obvious.
But organizations that opt to utilize these benefits have a responsibility to provide their workforce with a good standard of living, through wages and benefits that are reasonable and just.
For this reason, we look at the cost of living in several vital Nearshore markets in the context of global inflation that, said the World Bank in a blog last month, “has come back faster, spiked more markedly and proved to be more stubborn than major central banks initially thought possible.”
Russia’s invasion of Ukraine, the impact of the pandemic, the rising cost of raw materials and increased online demand are all reasons for rising inflation.
The price of the avocado, a staple food in Mexico, rose by 96% in 2021
The World Bank noted that 15 of 34 countries classified as being Advanced Economies by the International Monetary Fund’s World Economic Outlook have shown inflation of above 5% in the last 12 months since December 2021, while 78 of 109 Emerging Markets – where the bulk of Nearshore markets are placed – “are also confronting annual inflation rates above 5%.”
As James Bosworth, a blogger on risk in Latin America and founder of risk assessment firm Hxagon, told Nearshore Americas recently, inflation in the countries of the Nearshore market hit the pockets of citizens harder than in buying markets, like the US or Europe.
“One of the things that investors need to understand is that the percentage of Latin Americans’ income that goes on rent, food and transport is significantly higher than in the US,” he said.
Rise and Fall of the Cost of Living
Mexico City, Mexico
In the Mercer Cost of Living 2021 report, which uses data points including house prices, transportation costs, the price of utilities and food among others, Mexico City was placed at 152, a fall of 32 places in comparison to the 2020 edition. Monterrey, meanwhile, is placed 183.
Mexico City is a mammoth metropolis with a mammoth population to match. The pandemic, which shut the city for several months in early 2021, has had a clear impact on the cost of living.
One reason for the increase in house prices is the influx of ‘digital nomads’ who took advantage of the remote work situation to visit Mexico’s capital
Yet by October last year, apartment prices had already recovered and risen by 9.5%, according to real estate magazine Immobiliare.
Food prices are rising sharply too. The price of the avocado, a staple food in Mexico, rose by 96% in 2021, El Sol de Mexico reported, while bank BBVA predicts the Bank of Mexico will increase interest rates to 8% by the end of the year. Inflation will still be felt by households despite real wage increases, BBVA said.
The pandemic impacted Uruguay as it did everywhere else, and shrunk the country’s GDP by just under 6% in 2021. Though there has been a recovery, inflation rose to 8.85% in February 2022, and this has impacted the prices of various foodstuffs. The price of tomatoes have risen by 64.78%, pumpkin by 44.22%, and diesel by 6%, Bloomberg Linea reported.
In 2021, Montevideo fell 44 places in the Mercer Cost of Living 2021, moving from rank 88 in 2020 to 132 in 2021, a positive result that suggests the cost of living is falling.
In Colombia, broccoli prices doubled between December 2021 and February 2022
Uruguay’s La Nación newspaper also reported that the selling price of Montevideo’s real estate fell by 1.15% in January 2022 compared to December, the fourth consecutive month-on-month sales value drop.
According to the Mercer Cost of Living 2021 report, Santiago is becoming more expensive. The Chilean capital rose 26 places from 134 to 108 in the ranking.
The Chilean peso recovered some strength since December 2021 when it reached a high of 860 CLP against the US dollar. External factors including were exacerbated by social unrest within Chile itself, though protests have calmed since elections in November.
While national inflation (7.2%) is hovering around the same rate as Mexico and Colombia, house prices, which have risen constantly during the pandemic, are expected to drop in the coming months, Agustín Garcia, economist at Banchile Inversiones told Bloomberg Linea.
In the short term, prices of transport, tabbaco, alcoholic beverages and recreational activities are all expected to rise, the magazine reported.
Colombia has built two million homes in the past two decades. Bogotá, the country’s capital, has the highest real estate prices in the country, though BBVA predicted in 2021 that the rate of price rises will decelerate due to an “improved rate of housing sales”.
In the Mercer Cost of Living 2021, Bogotá ranked 180, a small increase from its 181 place the year before.
However, food prices across Colombia are rising more dramatically. Several foodstuffs included in the “canasta familiar” – the bundle of goods considered necessary for a family to live, and which is also used to track consumer prices and inflation – have shown increased prices.
Broccoli prices doubled between December 2021 and February 2022, while the common tomato was priced at 1,900 COP (US$0.50) in December and rose to 2,700 COP (US$0.71). Blackberries have almost doubled in price too.
Other food prices have fallen, however. Avocado, melon and peaches have all dropped in price.